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Progress in China-US negotiations hailed as breakthrough on path to a key trade deal

The biggest Chinese takeover of a US company – Shuanghui International’s US$4.7 billion bid for top pork producer Smithfield Foods – encountered another hurdle last week, but progress in bilateral talks last month offers hope that such problems could one day be a thing of the past.

An all-encompassing bilateral investment treaty (BIT) between China and the United States appears a step closer after advances in negotiations at the China-US strategic and economic dialogue in Washington on July 10-11.

Both countries announced “a significant breakthrough” towards reaching a BIT that would include all industries and all stages of investment – opening up 100 sectors for investment, including ones largely closed to foreign investors on the mainland such as financial services.

The two countries also agreed for the first time to carry forward negotiations on the basis of pre-establishment national treatment and a negative list. National treatment means that foreign investors are guaranteed the same treatment by a state as its own nationals and pre-establishment national treatment guarantees it before foreign investors have even entered the country, helping to minimise risk.

“It is a promise about the future: from now on you are not going to be discriminated against, ever,” said Julien Chaisse, a law professor at Chinese University.

A negative list, contrary to a positive list that specifies what foreign investors can do, makes clear what they cannot do, meaning everything else is possible.

The mainland currently treats foreign firms on the basis of a positive list and case-by-case approval, with no reliable channel for legal disputes, so pre-establishment treatment and a negative list would be ground-breaking and give US investors significant advantage over others.

But experts also warn against unrealistic expectations, with plenty of challenges ahead on the road to a BIT because both countries need to tackle political and nationalist obstacles.

Derek Scissors, a research fellow at the Washington-based Heritage Foundation, said there was a level of discomfort in both countries when a national brand was taken over, citing China’s rejection of Coca-Cola’s US$2.4 billion bid for Huiyuan in 2009 and the opposition to Shuanghui’s acquisition of Smithfield.

Smithfield said on July 24 that the Committee on Foreign Investment in the United States, which examines foreign investment for potential threats to national security, had decided to take an additional 45 days to review the planned deal.

“The problem in America is random political interference,” Scissors said. Whether the US Congress would accept or block a deal depended on domestic politics and the economy, with the result often being hard to predict.

He said that “in a way, there is more consistency in Chinese politics”, with strategic industries – of which there were many, such as financial services – all off the table. Whether state-owned enterprises will be granted exemptions will be at the crux of upcoming negotiations, but Scissors said a BIT would not prevent Beijing from protecting its SOEs.

Even without a BIT and without access to strategic industries, US firms had been able to invest US$70 billion on the mainland by May this year, compared with US$20 billion of Chinese FDI into the US, Ministry of Commerce spokesman Shen Danyang said after the dialogue meeting.

Scissors said private investment accounted for about 11 per cent of all Chinese investment in the US, up from around 4 per cent in 2010.

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